We are told that filing for bankruptcy should be the very last resort when dealing with extreme financial hardship. This is because it has long-term effects. For example, it will leave a negative impact on your credit score for up to 10 years. It will result in decreased access to credit, loss of assets, and sometimes forfeiture of tax refunds. In addition, bankruptcies are public information, so employers, customers, family, and just about anyone can access this information. Filing for bankruptcy must be a calculated decision and one that takes all factors into consideration, including the tax implications. In this blog article, we’ll look at the tax consequences of Chapter 13 bankruptcy and provide useful information to help individuals and companies make informed decisions.
What is Chapter 13 bankruptcy?
Chapter 13 bankruptcy is often known as the wage earner’s bankruptcy, including self-employed individuals and sole proprietors. This is because it is for those who have income but have fallen behind on payments for items purchased on credit. In Chapter 13 bankruptcy, your debts are reorganized, and a payment plan is established. A court-appointed trustee will supervise you and collect and distribute your payments. As long as you satisfy the terms of the repayment plan issued by the bankruptcy court, you should be allowed to keep your house after Chapter 13 bankruptcy. Under Chapter 13, you have 3-5 years to pay off your obligations while devoting all of your disposable income to debt repayment. That implies simple living. However, the Chapter 13 option allows you to erase unsecured debt, such as credit card bills, while catching up on home payments.
What happens to tax debt after filing for Chapter 11 bankruptcy?
Tax debts cannot usually be discharged (wiped away) in Chapter 13 bankruptcy. You instead repay your tax debts over the course of your Chapter 13 repayment plan. This could take three or five years. Typically, during bankruptcy, debts will be classified as priority or nonpriority. These tax debts need to be paid in full during the repayment period. This can include income taxes, FICA, some employment taxes, penalties, and others. On the other hand, nonpriority debts are usually combined with unsecured debts you have, such as credit card debt. These are the debts that are likely to be settled with creditors for less than what you owe. However, if you still have remaining taxes due when your repayment period ends, you must pay them in full. Any outstanding tax debts will not be discharged, and you will be obligated to pay them.
Filing Tax Returns After Bankruptcy
Like the other two chapters, it is imperative that you still pay your taxes while in Chapter 13. It is critical to keep up with your tax duties during your bankruptcy process, including timely filing of tax returns and payment of any taxes owed by the due date. While in bankruptcy, you can technically still receive tax refunds. However, they might be delayed or utilized to pay off tax debts.
Tax Help for Bankruptcy Filers
It can be difficult to pay taxes while in Chapter 13 bankruptcy. You may confront a variety of difficulties. Some examples are managing all payments, paying down interest and penalties on your tax debt, changing your repayment plan to incorporate tax liabilities if it hasn’t been done already. Taking care of both tax payments and overdue tax bills during Chapter 13 can be overwhelming, but it really is crucial to not only understand your tax obligations but also figure out how to manage your debt during your repayment plan. Rest assured, working with experienced bankruptcy lawyers and tax professionals can help mitigate the situation and help you successfully navigate the bankruptcy process. If you need tax help, Optima Tax Relief is here.
Navigating the intricate world of bankruptcy can be difficult, particularly when it comes to comprehending the tax implications. Chapter 11 bankruptcy is a powerful instrument for reorganizing individuals and enterprises and regaining financial stability. However, it is critical to understand how this process impacts taxes and plan properly. In this blog article, we’ll look at the tax consequences of Chapter 11 bankruptcy and provide useful information to help individuals and companies make informed decisions.
What is Chapter 11 bankruptcy?
Also known as a “reorganization” bankruptcy, Chapter 11 bankruptcy is much more complicated than its counterparts. Chapter 11 bankruptcy is a type of bankruptcy in which you keep your financial assets and exempt property. Unlike Chapter 7 bankruptcy, you are the appointed trustee in this sort of bankruptcy case. Additionally, you can borrow new money. With Chapter 11 bankruptcy, some taxes can be discharged, but it varies per situation. Failure to properly reorganize and obtain approval for a debt repayment plan may result in the conversion of a Chapter 11 case to a Chapter 7. In this case, assets are liquidated to pay off debt.
What happens to tax debt after filing for Chapter 11 bankruptcy?
Chapter 11 bankruptcies typically do not discharge tax debt. In Chapter 11, pre-petition tax liabilities are categorized as “priority claims.” These claims must be paid in full, and tax officials are usually given priority over other creditors. However, there are circumstances where taxes can be considered a “dischargeable debt” that may be forgiven through bankruptcy. The amount of tax debt that can be erased is determined by a variety of factors, including the type of tax owed, the length of time the tax obligation has been outstanding, and the corporation’s or individual’s financial means.
Filing Tax Returns After Bankruptcy
Businesses must continue to file their tax returns as required by the IRS under Chapter 11 bankruptcy. Failure to meet these duties may result in penalties and audit risks. It’s critical to work with a skilled tax professional to ensure timely and accurate filing of tax returns, as noncompliance may stall the bankruptcy process and cause further legal issues. While in bankruptcy, you can still obtain tax refunds. However, refunds may be delayed or used to pay off tax debts.
Tax Help for Bankruptcy Filers
Throughout the bankruptcy process, it’s crucial that you remain compliant with the IRS, specifically with tax filing and reporting. Failure to file tax returns on time and correctly may result in penalties and other problems. Also keep in mind that if you do declare bankruptcy, you may have additional reporting requirements, such as alerting the IRS of your bankruptcy filing. Given the complexities and potential tax ramifications of bankruptcy, it is strongly advised to seek professional advice. Consulting with tax professionals as well as bankruptcy attorneys will provide you with the information you need to successfully navigate the process. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Bankruptcy is an exhausting process that individuals and corporations may have to go through when they are overburdened by financial obligations. While it provides the opportunity for a fresh start, it is critical to be mindful of the tax implications. In this blog article, we will discuss the tax implications of bankruptcy, assisting you in understanding the potential penalties and providing guidance to help you navigate this complex scenario.
Taxes After Bankruptcy
The discharge of debts is one of the key benefits of bankruptcy. It allows people or organizations to erase or restructure their financial commitments. It is important to note, however, that not all obligations, including certain tax debts, are immediately forgiven. Much of it will depend on which type of bankruptcy you file for.
What is Chapter 7 bankruptcy?
Chapter 7 bankruptcy is commonly known as “liquidation bankruptcy” or “straight bankruptcy.” It’s a legal procedure that allows individuals or corporations to start over financially by erasing the majority of their debts. It is the most common type of personal bankruptcy in the United States. A trustee is appointed in Chapter 7 bankruptcy to oversee the proceedings and manage the debtor’s assets. The primary function of the trustee is to identify any non-exempt assets that can be sold or liquidated to repay creditors.
What happens to tax debt after filing for Chapter 7 bankruptcy?
Income taxes can be discharged by filing Chapter 7 bankruptcy if you meet certain requirements including:
Your tax debt is income based (either federal or state)
You did not intentionally evade making tax payments and all actions were lawful
Your tax debt is at least 3 years old
You filed a tax return at least 2 years before filing for bankruptcy. Late returns and substitute returns filed by the IRS generally do not count.
The taxes in question were assessed at least 240 days before filing for bankruptcy
You must note that any tax liens recorded before the bankruptcy will remain in effect. You will still need to pay off the tax lien when you sell the property with the lien attached to it.
In addition, property taxes owed before the bankruptcy is filed will still be owed. Taxes other than federal and state will also still be due, including FICA, Medicare, sales tax, etc. You should also expect to continue paying certain employment taxes and penalties.
Filing Tax Returns After Bankruptcy
When filing, you will use Form 1040 for your individual return and your appointed trustee will file Form 1041 on your behalf, which is the U.S. Income Tax Return for Estates and Trusts. You may receive Form 1099-C, Cancellation of Debt from creditors that canceled $600 or more in debt on your behalf. Typically, any canceled debt should be reported on your tax return as taxable income. However, having debt forgiven through bankruptcy typically exempts an individual from paying taxes on the canceled debt. When your debt is discharged through bankruptcy, you’ll need to file IRS Form 982, About Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness to inform the IRS of your discharged debt that should be excluded from your taxable income.
Tax Help for Bankruptcy Filers
Compliance with tax return filing and reporting duties is critical throughout bankruptcy. Failure to file tax returns on time and appropriately might result in penalties and further issues. Furthermore, if you file for bankruptcy, you may have extra reporting duties, such as notifying the IRS of your bankruptcy filing. Given the intricacy and potential tax implications of bankruptcy, it is strongly advised to obtain expert guidance. Consulting with both tax professionals and bankruptcy attorneys will give you the knowledge you need to successfully navigate the process. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
You may notice several deductions on your paycheck, such as federal income tax, state taxes, and Social Security. The Federal Insurance Contributions Act (FICA) tax is a critical component of these deductions. While the FICA tax may appear complex at first, understanding its purpose and ramifications can help you make sound financial decisions. This blog post will go into detail on the FICA tax, its components, and how it affects your salary.
What is FICA Tax?
The FICA tax is a mandatory payroll tax that is deducted from the earnings of American workers. It is an abbreviation for the Federal Insurance Contributions Act, which was passed in 1935 in order to provide social welfare programs such as Social Security and Medicare. The major purpose of the FICA tax is to provide financial stability for retired and disabled people as well as healthcare benefits to eligible residents. Most employees have a total of 15.3% deducted from their paychecks for FICA tax. However, they are only responsible for paying half, while their employers are responsible for the other half.
Social Security
The Social Security tax accounts for the majority of the FICA tax. It is 12.4% of your wages, half paid by you and half paid by your employer. The Social Security program, which pays retirement, disability, and survivor benefits, is funded by this tax. It is crucial to note, however, that the Social Security tax has an income cap. You no longer pay Social Security tax for that year if your wages surpass the cap. In 2023, FICA tax is only collected on the first $160,200 of earnings but this figure may change annually.
Medicare
The Medicare tax, which amounts to 2.9% of your income, half paid by you and the other half paid by your employer, is the smallest element of the FICA tax. This tax supports the Medicare program, which provides vital healthcare benefits to people 65 and older, as well as certain disabled people. Unlike the Social Security tax, there is no income limit for the Medicare tax. In other words, all of your wages are taxed.
An additional 0.9% Medicare tax is placed on incomes above a particular level for high-income individuals. This threshold is set at $200,000 for single filers and $250,000 for married couples filing jointly in 2023. This Medicare tax is intended to help pay for the Affordable Care Act and the Medicare program. Employers are not required to pay this tax.
Exemptions
These rules apply to the majority of workers but there are some exceptions. For example, self-employed individuals are responsible for paying the full 15.3% FICA tax since they do not have an employer to split the cost. On the other hand, there are a few groups that are exempt from paying the tax altogether. This includes college students who work on the campus in which they study, some nonimmigrants and nonresident aliens, and some religious groups. However, it’s important to note that opting out of this tax also means opting out of receiving Social Security and Medicare benefits.
How to Calculate FICA Tax
As mentioned earlier, you are only responsible for half the required 15.3% FICA tax, or 7.65%. To find out how much you will pay in FICA taxes per year, you can multiply your gross income (up to $160,200 in 2023) by 7.65%. If you are self-employed, you should multiply your gross income (up to $160,200 in 2023) by 15.3%. Keep in mind that you may need to add in the additional 0.9% if you are a high earner. In any case, you should always be mindful of how much taxes you are paying throughout the year in order to avoid a surprise tax bill during tax season. Things like switching jobs or working multiples jobs at a time can result in overpaying or underpaying FICA tax. Optima Tax Relief has over a decade of experience helping taxpayers with all kinds of tax situations.
Tax deductions can drastically reduce your total tax liability and allow you to save money. While medical bills can be a significant hardship for many individuals and families, it is critical to understand that certain medical expenses are tax deductible. Understanding the eligibility criteria and documentation requirements will help you in optimizing your deductions and possibly lowering your tax payment. In this post, we will look at medical expenses that are tax deductible.
Tax Deductible Medical Expenses
You might be surprised to hear that the IRS lists over 80 medical expenses that you can deduct from your taxes. While the full list of eligible expenses can be found on IRS Publication 502, some common expenses include:
Acupuncture
Ambulance services
Braille reading materials
Costs incurred to accommodate your home to a disabled condition
Costs incurred to install special equipment in your vehicle that accommodates a disabled condition
Chiropractor
Contact lenses
Dental treatment
Eye exams
Fertility treatment
Hearing aids
Lab fees
Medicines
Nursing home expenses
Physical exams
Psychiatric care
Transplants
X-rays
Medical Expenses That Are Not Tax Deductible
You should always be aware of the medical expenses you may not deduct during tax time including but not limited to:
Cosmetic surgery (some limitations apply)
Funeral expenses
Future medical care
Maternity clothes
Nonprescription drugs and medicines
Nutritional supplements
How to Claim Medical Expense Deductions
In order to deduct medical expenses on your tax return, you will need to itemize your deductions. That being said, it is really only worth doing if your medical expenses exceed the standard deduction. The 2023 standard deduction is $13,850 for a single filer and those who are married but filing separately, $27,700 for married couples filing jointly, and $20,800 for heads of households. These figures are set to increase for tax year 2024 to the following:
Single Filers, Married Couples Filing Separately: $14,600
Married Couples Filing Jointly: $29,200
Heads of Households: $21,900
If it seems itemizing your deductions would save you money than taking the standard deduction, you can deduct your qualified medical expenses using Schedule A. Keep in mind that you may only deduct unreimbursed medical expenses paid during the year previous. In addition, you can only deduct expenses that exceed 7.5% of your adjusted gross income (AGI). For example, if your AGI is $45,000, then the first $3,375 (7.5% of $45,000) of qualified medical expenses cannot be deducted. Anything that exceeds $3,375 can be deducted. Assuming you had $10,000 of unreimbursed medical expenses for the year, you would be allowed to deduct $6,625 of it on your tax return.
If you do decide to deduct medical expenses during tax time, be sure to keep adequate records of your expenses during the year. Keep receipts, invoices, statements, and any other relevant documentation that validate your medical expenses. Not doing so can result in financial loss, risk of audits, and dealing with the IRS. If the IRS has reached out to you about your tax situation, we can help. Optima Tax Relief has over a decade of experience helping taxpayers with tough tax situations.
